The inflation data suggest the Federal Reserve will have to continue hiking interest rates when it meets in June, some analysts say. "There is little evidence that the April CPI report was driven by one-time factors and, as a result, the second month of an outsized gain in the core cannot be dismissed," says Lehman Brothers economist Drew Matus. "We believe that this will keep the pressure on the Fed to maintain their inflation-fighting credentials and increases the odds of a June rate hike."

Indeed, for the Fed to pause from its tightening cycle at this point would be a mistake, others say. "The upward pressure on inflation is coming from the services area and thus inflation reports such as the PPI become less of a guide to trends in inflation," says John Ryding, chief U.S. economist at Bear Stearns. "We have argued that as the home ownership market eases and the rental market tightens, higher rents will put upward pressure on inflation and that this dynamic, once it begins, is fairly sticky. This raises the risk, therefore, of higher inflation readings going forward."

The markets were also dealing with recent reversals in industrials, commodity prices and the energy complex. "This is what has really been the buttress of the stock market for the last six months or so, and we've lost that in the last couple of trading sessions," says Gary Wolfer, senior portfolio manager with Univest Wealth Management & Trust. "The market is grasping for some form of leadership."

Investors now await the May 25 preliminary reading of gross domestic product (GDP) for further inflation clues. First-quarter GDP growth is forecast to be revised up to 5.8%, from the 4.8% gain in the advanced report, says Action Economics.

On the economic docket Thursday, initial jobless claims are expected to drop 9,000 to 315,000 for the week ended May 13. The April leading indicators index is seen remaining unchanged.

In company news Wednesday, Hewlett-Packard was the Dow's lone bright spot, rising more than 3% after the computer maker posted a 51% increase in fiscal second-quarter earnings. The upbeat results followed a profit warning last week from rival Dell (DELL ).

On the downside, Applied Materials (AMAT ) was lower after the maker of tools used to manufacture chips said orders this quarter will rise from 5% to 10%, less than the 15% analysts expected.

French media giant Vivendi (V) was lower despite a 41% rise in first-quarter earnings. The company also said it has turned down a breakup proposal by shareholders.

Treasury Market

The Treasury market also suffered in the wake of the April CPI report as yields rose on the solid inflation data. Prices for 10-year Treasury notes fell to 99-22/32 with a yield of 5.16%, while 30-year bonds dropped to 88-09/32 for a yield of 5.28%.